STRATEGIC MARKET INSIGHTS 3Q 2017

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1 STRATEGIC MARKET INSIGHTS 3Q 2017 A COLLECTIVE ANALYSIS OF MARKET PERSPECTIVE DEVELOPED BY PNC S ADVISORY AND SPECIALTY BUSINESSES CONTENTS M&A MARKET IPO AND FOLLOW-ON MARKET DEBT CAPITAL MARKETS ESOP INSIGHTS RECENT TRANSACTIONS

2 MARKET INSIGHTS 3Q 2017 M&A MARKET EXECUTIVE SUMMARY Following a record first quarter, in which more than 3,500 M&A transactions were consummated in the United States and Canada, preliminary data suggest transaction volume dipped slightly in the second quarter while still posting a record 2Q. Though political initiatives to bolster economic growth domestically have seemingly remained at a standstill since the election, M&A market dynamics remain healthy and intact. The M&A outlook continues to be positive, with all signs pointing to a strong second half of the year. 2Q 2017 M&A MARKET REVIEW The M&A market environment remained healthy throughout the second quarter of Following a backlog of transactions closing in the first quarter, second quarter volume dipped slightly. The strong economic backdrop, available debt financing and deployable capital from both private equity firms and strategic buyers continue to fuel the M&A market environment. First half data suggest transaction volume in the United States and Canada can reach a new record in 2017, potentially eclipsing 2007 volume of nearly 13,000 transactions. NORTH AMERICAN M&A VOLUME (Number of Transactions) 14,000 12,000 10,000 8,000 6,000 12,132 8,836 8,289 8,526 9,768 10,514 11,976 12,904 10,722 9,336 9,845 9,804 10,049 10,328 11,252 10,902 11,631 4,000 3,500 3,000 2,500 2,000 1,500 2,739 2,855 2,805 2,853 2,760 2,867 2,729 2,546 2,660 2,930 2,889 3,152 3,502 4,000 1,000 2, Note: Includes transactions with a target located in the U.S. or Canada. Source: Thomson Financial M&A Market 1

3 M&A Market 2 S&P 500 aggregate cash positions (excluding financial companies) have hovered near $1.5 trillion over the past few years, which has led to increased scrutiny around balance sheet management and utilization. The pressure to supplement organic growth via acquisitions continues to be top of mind for boards and shareholders. S&P 500 AGGREGATE CORPORATE CASH BALANCES 1 ($ in Billions) $1,600 $1.4 Trillion in Aggregate Cash $1,400 $1,200 $1,000 $800 $600 $400 $ Q 17 U.S. private equity firms have approximately $550 billion of deployable capital to invest, holding most in 2013 to 2016 vintage funds. Firms have demonstrated an eagerness to put capital to work, particularly in companies with a proven track record through economic cycles. ($ in Billions) PRIVATE EQUITY CAPITAL AVAILABLE $600 $500 $403 $495 $476 $447 $422 $449 $445 $495 $521 $549 $ $ $300 Cumulative Availability Availability by Vintage 2013 $ $ Excluding financial companies Sources: Factset, PitchBook

4 M&A Market 3 Private equity backed deal multiples for middle market companies also reflect the competition to deploy capital within the asset class and the overall strength of the M&A market. 12.0x AVERAGE PURCHASE PRICE BREAKDOWN BY SPONSORS x 8.0x 6.0x 4.0x 2.0x 9.3x 8.5x 8.1x 7.0x 7.2x 6.7x 3.4x 3.4x 3.3x 2.9x 0.4x 2.9x 3.2x 0.4x 0.6x 0.8x 0.6x 0.9x 3.1x 2.9x 3.5x 4.6x 5.4x 4.1x 10.7x 10.2x 10.1x 9.6x 8.8x 8.3x 8.4x 8.2x 7.9x 5.3x 4.3x 5.0x 4.7x 6.6x 3.8x 4.1x 3.7x 3.3x 4.1x 0.1x 0.2x 0.1x 3.4x 0.4x 0.1x 0.9x 0.6x 0.8x 1.0x 0.7x 3.6x 3.3x 3.8x 3.8x 4.5x 5.1x 5.1x 4.7x 5.2x 2.6x 0.0x H 17 Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others In LBO transactions, the trend of a relatively increased level of equity contribution as a percentage of total capital structure continues, as private equity firms are willing to stretch and potentially over-equitize to ensure they close transactions. INDUSTRY UPDATES Below are select recent sector updates prepared by the firm. All of the most recent Industry Group updates can be found here. The firm s Aerospace, Defense & Government Services (ADG) Group recently attended the Paris Air Show. Many interesting trends within the aerospace industry were highlighted, including: Boeing announced orders and commitments for 571 aircraft, which significantly exceeded most analysts expectations. Business aviation continues to recover. Gulfstream featured its new G500 and announced that its overall European deliveries have risen by 25% over the past 5 years to 230 aircraft. 1 Deals less than $50 million of EBITDA Source: Standard & Poor s

5 M&A Market 4 Please click here to read more about our ADG Group s observations at the Air Show. In addition, Harris Williams & Co. s ADG Group recently published its latest Industry Update, which features a review of valuation and M&A transaction data for each sector. The update can be accessed here. Harris Williams & Co. s Business Services Group released its latest Industry Update, which provides an equity trading overview, economic and M&A market trends, and recent industry news and articles. Click here to read more. The firm s Business Services Group also recently published an Environmental and Facility Services Industry Update, which includes a summary of select recent M&A activity. Click here to view the Environmental and Facility Services Industry Update. Harris Williams & Co. s Energy, Power & Infrastructure (EPI) Group recently published an Industry Update that includes a review of select recent M&A activity, an overview of public markets and industry statistics. In the Update, the Group reviews the outlook for renewable energy and the impact of the expanding petrochemicals sector on the plastics industry. Click here to read more. FOR MORE INFORMATION To discuss opportunities in M&A for your business, please contact Bill Watkins at wwatkins@harriswilliams.com. Investment banking services are provided by Harris Williams LLC, a registered broker-dealer and member of FINRA and SIPC, and Harris Williams & Co. Ltd., which is a private limited company incorporated under English law with its registered office at 5th Floor, 6 St. Andrew Street, London EC4A 3AE, UK, registered with the Registrar of Companies for England and Wales (registration number ). Harris Williams & Co. Ltd. is authorized and regulated by the Financial Conduct Authority. Harris Williams & Co. is a trade name under which Harris Williams LLC and Harris Williams & Co. Ltd. conduct business. Harris Williams LLC is a subsidiary of The PNC Financial Services Group, Inc The PNC Financial Services Group, Inc. All rights reserved. CIB ENT PDF

6 MARKET INSIGHTS 3Q 2017 IPO AND FOLLOW-ON MARKET EXECUTIVE SUMMARY 1 Solebury experienced continued success in 2Q 2017, advising on a large percentage of offerings in an increasingly active equity issuance market. Solebury advised on 26.1% of IPOs by proceeds and 23.5% of IPOs by volume. Solebury engagements included some of the most prominent and successful amongst the 2Q 2017 class of IPOs, including Floor & Decor, Schneider National, Wide Open West and Azul. Solebury also excelled in the secondary markets, with market share of 49.3% and 24.2% on marketed follow-on and block trade issuance respectively. Engagements included first follow-ons for Canada Goose and JELD-WEN following their successful 1Q 2017 IPOs. IPO MARKET UPDATE IPO issuance in 2Q 2017 continued 2017 s large uptick as compared to IPO pricings were up substantially over 2Q 2016 in both units (+82%) and volumes (+93%). While proceeds were down 5% QoQ (largely due to the presence of Snap s IPO in 1Q), 2Q saw a large jump in the number of transactions (+82%). 2Q 2017 saw a focus on IPOs in growth sectors, with TMT and healthcare issuance leading the way. Aftermarket trading patterns remained muted but positive, with IPOs trading up 11% on average in the week following pricing, which compares to 8% in 1Q 2017 and 19% in 2Q QUARTERLY IPO VOLUME Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 3Q 13 4Q 13 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 $25,000 $20,000 $15,000 $10,000 $5,000 Proceeds ($mm) Volume 1 Market share calculated by proceeds between 4/1/2017 and 6/30/2017. Excludes REITs and MLPs. Only Secondary Follow-ons and Blocks included in market share statistics. 2 Includes U.S. IPOs greater than $50 million. Excludes BDCs, SPACs, ADRs, IDSes, CEFs and Chinese issuers. Source: Dealogic IPO and Follow-On Market 1

7 IPO and Follow-On Market 2 QUARTERLY OFFER TO 7-DAY PRICE PERFORMANCE 1 30% 25% 20% 15% 10% 5% 0% -5% -10% 26% 20% 20% 22% 12% 14% 16% 14% 16% 18% 20% 21% 14% 14% 10% 11% 1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 3Q 13 4Q 13 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15-7% 1Q 16 19% 2Q 16 28% 3Q 16 7% 8% 11% 4Q 16 1Q 17 2Q 17 2Q: IPO PRICING BY INDUSTRY 2Q: IPO BACKLOG BY INDUSTRY Sector # of Deals Sector # of Deals Consumer 0 Consumer 4 Energy / Power 5 Energy / Power 8 FIG 4 FIG 1 Healthcare 10 Healthcare 5 Industrials 2 Industrials 4 Real Estate 5 Real Estate 2 Retail 1 Retail 1 Services 1 Services 4 TMT 11 TMT 1 Transportation 1 Transportation 2 PRICING RELATIVE TO RANGE 27% 23% 28% 15% 50% 57% Above Within Below 33% 24% 43% 1Q 17 2Q Average 1 Includes U.S. IPOs greater than $50 million. Excludes BDCs, SPACs, ADRs, IDSes, CEFs and Chinese issuers. Source: Dealogic

8 IPO and Follow-On Market 3 FOLLOW-ON MARKET UPDATE Marketed follow-on issuance was mixed, with a jump YoY and a decrease QoQ in both volume and proceeds. Moderate discounts signal the relative health of the follow-on market in 2Q Healthcare and real estate transactions were particularly prevalent, accounting for half of all volume at 34% and 16% respectively. QUARTERLY MARKETED FOLLOW-ON VOLUME $50, $40,000 $30, $20,000 $10, Q 17 1Q 17 4Q 16 3Q 16 2Q 16 1Q 16 4Q 15 3Q 15 2Q 15 1Q 15 4Q 14 3Q 14 2Q 14 1Q 14 4Q 13 3Q 13 2Q 13 1Q 13 4Q 12 3Q 12 2Q 12 1Q 12 Volume Proceeds ($mm) 1 2Q: INDUSTRY PRICING SUMMARY 1 QUARTERLY MARKETED FOLLOW-ON DISCOUNTS 1 Energy / Power 3% Consumer 5% Transportation 6% FIG 7% Services 3% Healthcare 34% 0% -5% -10% -15% -5.5% -6.2% -5.6% -5.9% -5.0% -5.7% -6.9% -8.2% -10.1% -9.8% 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q % 3Q % 4Q % -5.7% 1Q 17 2Q 17 Industrials 10% TMT 16% Real Estate 16% 1 Includes U.S. follow-ons greater than $50 million. Excludes BDCs, SPACs, ADRs, IDSes, CEFs and Chinese issuers. Source: Dealogic

9 IPO and Follow-On Market 4 Block trade issuance tapered off slightly, both in terms of volume and proceeds. Average bid discounts tightened again to 3.8%, their lowest levels since 4Q Real estate saw a large jump in activity, comprising 27% of 2Q block trade transaction volume, while the energy sector continued to slow, dropping to 11%. QUARTERLY BLOCK TRADE VOLUME 1 80 $30, $20,000 $10, Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 3Q 13 4Q 13 1Q 14 2Q 14 3Q 14 Volume 4Q 14 3Q 15 2Q 15 1Q 15 Proceeds ($mm) 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 2Q: INDUSTRY PRICING SUMMARY 1 QUARTERLY BLOCK TRADE BID DISCOUNTS 1 Transportation 7% Industrials 9% Services 4% Real Estate 27% 0% -5% -10% -4.1% -3.8% -3.7% -3.5% -3.6% -4.6% -4.6% -3.8% -6.1% -5.3% -5.0% -4.6% -3.8% -5.9% -15% Healthcare 9% 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 Consumer 9% TMT 13% FIG 11% Energy / Power 11% FOR MORE INFORMATION Solebury Capital is a global advisory firm and registered broker-dealer exclusively focused on equity capital markets advisory. Please visit solecap.com. 1 Includes U.S. follow-ons greater than $50 million. Excludes BDCs, SPACs, ADRs, IDSes, CEFs and Chinese issuers. Source: Dealogic Equity capital markets advisory and related services are provided by Solebury Capital LLC, a registered broker-dealer and member of FINRA and SIPC. Solebury Capital LLC is a subsidiary of The PNC Financial Services Group, Inc The PNC Financial Services Group, Inc. All rights reserved. CIB ENT PDF

10 MARKET INSIGHTS 3Q 2017 DEBT CAPITAL MARKETS EXECUTIVE SUMMARY Bank loan capital is broadly available for middle market companies. Banks continue to have a strong appetite for funded assets, and substantial non-bank capital is coming into the market. The leveraged loan market is stabilizing as new-issue money consumes the excess capital that formed over the past 12 months. The high-yield bond market remains open and attractive for issuers. Investment grade lending was down in the first half of the year, primarily on a slowdown in large M&A-related financings. However, bank lenders still have a deep appetite for funded assets. MIDDLE MARKET The middle market is open for business. Banks have capital to lend, and non-bank direct lenders are raising new money for this segment. In fact, 95% of banks responding to a Thomson Reuters survey reported missing their 2Q lending goals, up from an already-high 75% last quarter. That data confirms what our own buy-side accounts are feeling: banks are increasingly hungry for more new-issue middle market deals. % OF LENDERS THAT DID NOT MEET THEIR LENDING GOAL TOTAL MIDDLE MARKET VOLUME 100% 1Q17 2Q17 $70 Non-sponsored Sponsored % of Respondents 90% 80% 70% 60% 50% 40% 30% 20% $ in Billions $60 $50 $40 $30 $20 $10 Middle market volume trended down since 2013, specifically non-sponsored 10% 0% Bank Non-Bank 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Sources: PNC DCM, Thomson Reuters LPC Debt Capital Markets 1

11 Debt Capital Markets 2 Though middle market M&A is a bright spot (driven primarily by leveraged buyouts), overall we re seeing declining loan volume. And while banks are hungry for assets, they are carefully scrutinizing spread, credit stats, access to the borrower and the opportunity to obtain ancillary business for deals that a bank would classify as leveraged lending. We saw strong leveraged buyout volume last quarter, a trend we expect to continue into the second half of the year. In fact, Thomson Reuters data show that 32% of sponsored deals were leveraged at 7x Debt/EBITDA or more, the highest since We expect to see oncoming volume from direct lenders as they raise capital at a strong clip. With non-bank lenders need to invest their new money, private equity firms have a ready source to finance their deals. In conclusion, lenders competing for deals are beginning to create a lending environment with higher leverage, looser deal terms and more aggressive structures. $ in Billions CAPITAL RAISED FOR MIDDLE MARKET LENDING $35 $30 $25 $20 $15 $10 $5 $2.2 1Q14 $7.5 $11.1 $8.6 $8.1 $7.5 $6.1 $5.3 $2.7 $4.5 $3.4 $32.2 $13.9 $14.8 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 ASSET-BASED LENDING In asset-based lending, we re seeing a continuing trend where deals are getting clubbed up rather than broadly syndicated. The market is issuer-friendly, and both sponsors and borrowers are shifting away from the traditional retail syndication to a model where they work with their closest relationship banks. The clubby model means there s more ancillary business to spread across fewer lenders (who in turn take larger hold sizes), and the borrower has fewer banks to manage. The tighter relationship with fewer banks coupled with strong competition among lenders is promoting more borrowerfriendly pricing and structure. That said, we expect the tough credits to continue to see a limited syndication audience as banks scrutinize deals that are more on the fringes of their risk boxes. This trend couples nicely with the trend of large capital raising by direct lenders, which creates the opportunity for these lenders to play a bigger role across unitranche, Term Loan B, second lien and mezzanine tranches in what s becoming a changing landscape. As such, we expect to see more ABL lenders working directly with direct lenders to provide onestop shop financing solutions. Sources: PNC DCM, Thomson Reuters LPC

12 Debt Capital Markets 3 LEVERAGED/HIGH YIELD $ in Billions $ in Billions CLO ISSUANCE UP WHILE LOAN FUND INFLOWS SLOWED $40 $35 $30 $25 $20 $15 $10 $5 Prime-fund flows CLO Issuance $2.7 $9.6 $11.4 $2.0 $33.8 $26.2 $19.9 $17.4 3Q16 4Q16 1Q17 2Q17 1H 2017 INSTITUTIONAL NEW ISSUE VOLUME SIGNIFICANT $500 1H 2H $400 $300 $200 $ LEVERAGED LOAN SUPPLY/DEMAND IMBALANCE In the leveraged loan market, new capital is still flowing into the sector, which is driving increased deal volume. In fact, 1H 2017 institutional new-issue volume was greater than some full-year numbers in earlier years. For the last 16 months we saw net demand (new capital from CLOs, loan fund inflows and repayments) outstrip supply (new-issue loans), causing a supply shortage. The strong demand for so long created an environment that allowed many borrowers to re-price their loans. But in June, huge new-money issuance caused a surplus of net supply, sopping up some of the excess capital from the last four quarters, and turning the attention of arrangers away from re-pricing activity. We re still seeing re-prices, but less than the tremendous volume we saw in 1Q, where 67% of all institutional loan volume was related to re-pricing activity. The best-quality institutional credits with an issuer rating in the high BB range are re-pricing their Term Loan Bs to L , and the better-quality, liquid credits with ratings in the mid to high B range are, generally, re-pricing to L Because of the still-borrower-friendly new-issue market, new-issue leverage is creeping up, and EBITDA add-backs as a percent of EBITDA are increasing, especially for sponsored deals. Also, despite tightening spreads in the high yield market, more issuers are issuing pre-payable, floating rate leveraged loans compared with fixed-rate, non-callable high yield bonds. $ in Billions $40 $30 $20 $10 -$10 -$20 -$30 -$40 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 It s an interesting trend given how tight the high yield market is pricing fixed rate paper, but it speaks to the sheer amount of loan re-pricing activity and arguably leveraged / high yield issuers desire and belief that they can and will de-lever their balance sheets. Worth mentioning is the fact that an increasing percentage of new-issue term loans are for issuers rated B or worse. Sources: PNC DCM, S&P Capital IQ

13 Debt Capital Markets 4 LOANS V. BONDS: SINGLE B LOANS DRIVE VOLUME 80% 70% 60% 50% 40% 30% 20% 10% 0% Loans / (Loans+Bonds) Loans Rated B or Worse H17 Regarding high yield in particular, 2Q saw roughly average volume, but new-issue yields tightened to 6.40% from 6.55%. Better-quality credits led issuance as 37% of volume was for deals rated BB or higher (up from 30% last quarter), while B or lower credits fell to 37% from 47% last quarter. One trend we re watching: triple-c rated credits accounted for 12.8% of issuance, up for the second consecutive quarter. INVESTMENT GRADE Wanted: high-grade loans. Investment grade loan volume was depressed last quarter, especially for loans backing large-ticket M&A transactions. Even though refinance activity held up the volume number, flat spreads are limiting refinance activity to maturity extensions rather than to cut pricing. Overall, in order to book assets, banks appear to be loosening their lending standards. After six quarters of net tightening (with the last two quarters closer to neutral), banks participating in the Federal Reserve s Senior Loan Officer Opinion Survey reported loosening C&I lending standards. 1 Our experience in the market is confirming this trend. In fact, in the secondary loan market, we re seeing buyers exhibit a strong appetite for investment grade loans, which is pushing asset sale prices higher. % of Respondents Reporting Net Tightening LENDING STANDARDS SHIFT OUT OF NEUTRAL 20% 10% 0% -10% -20% After six periods of net tightening, banks appear to be loosening standards 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 I-GRADE DRAWN SPREADS REFINANCING SUSTAINS U.S. I-GRADE LOAN MARKET bps BBB A Recession $ in Billions $500 $400 $300 $200 $100 Refinancing M&A 0 1Q95 1Q97 1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15 1Q17 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 1 Federal Reserve; May 8, 2017 Sources: PNC DCM, S&P Capital IQ, Thomson Reuters LPC

14 Debt Capital Markets 5 In the investment grade corporate fixed income market, volume is healthy as issuers tapped the market ahead of anticipated rate increases. As a result of the rate increases and widening treasury yields, investors are buying bonds in the secondary market, causing spreads over treasuries to tighten. As spreads tighten, the new-issue market is still robust. Data from PNC s corporate bond syndicate desk show that on average investment grade bond deals are still about 3x oversubscribed, in line with the average of 3.08x year-to-date. AVERAGE I-GRADE CORPORATE BOND SPREAD OVER TREASURY I-GRADE CORPORATE BOND VOLUME 175 bps 150 bps 125 bps $ in Billions $500 $400 $300 $200 $266.8 $239.4 $367.6 $382.8 $298.5 $272.1 $379.8 $366.8 $369.9 $230.5 $417.2 $ bps $ bps Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Sources: PNC DCM, Bloomberg

15 Debt Capital Markets 6 REAL ESTATE Recently, the headlines have been littered with descriptions of the decline of the traditional retail center: store closings, retailer bankruptcies and the darlings of online retailing delivering packages with drones. It s easy to read the headlines and get caught up in the whirlwind. At this point in the cycle, market participants have all acknowledged well-documented challenges, and there is no arguing that retail is in an evolutionary period. Lenders are examining their portfolios as regulatory bodies and executive management focus on the potential impact of this evolution. So, is capital available for retail assets? Yes, but the transaction might look different than it did a year ago. Street retail and lifestyle centers may currently garner the lowest cap rates, but these can be more challenging property types for lenders to underwrite. These properties are usually in urban settings, shadow anchored by a unique offering or highly dependent on tourism. It may be difficult for a lender to understand those market dynamics, which may impact pricing and structure. Conversely, centers that are grocery-anchored typically have the grocer leased for an initial term of 15 or more years with additional extension options. Ideally, the grocer produces a majority of the property s revenue and provides consistent traffic into the center. With good demographics in the surrounding area, these properties more easily fit into most lenders structural parameters. Banks are willing to lend on most retail property types for a stabilized asset (see descriptions in the table below). This assumes strong operating performance (solid tenant sales, high occupancy and consistent cash flows) in a strong market with an appropriate structure. Property Type Grocery-Anchored Center Power Center (With Grocer) Power Center (No Grocer) Non-Grocer Strip Street Retail Lifestyle Center Unanchored Strip Green Street Definition Property with a grocer and small shop space, but no more than two total anchor boxes over 20k sf. These properties generally range in size from 50k sf. to 150k sf. Property with three or more anchor boxes over 20k sf. and at least one grocer. Property with three or more anchor boxes over 20k sf. and no grocer. Property with one or two anchor boxes over 20K sf. and no grocer. Shop space in retail-heavy corridors, generally in downtown cores. Street retail includes both tourist-focused retail and community-serving, centrally-located activity nodes that cater as much to local residents as they do to visitors. Property that is typically comprised of upscale retailers as well as several dining and entertainment venues. Most lifestyle centers have an outdoor setting, many of which attempt to replicate a Main Street feel. Property that has multiple small shop boxes but no discernable anchor. Sources: PNC DCM, Green Street Advisors

16 Debt Capital Markets 7 Regional Malls Regional malls can present even greater financing challenges today if they are lower in productivity/sales, are new developments (especially with lower initial leasing) or are very large. Generally speaking, an asset could be located on Main and Main in a dense, high income market, but given the additional scrutiny, lenders may require a tighter structure than what was achievable 12 months ago. These may include any of the following: Lenders are requiring more upfront equity and placing a greater level of dependence and reliance on the sponsor/guarantor. Thus higher levels of guarantor covenants may be required (i.e., minimum liquidity, a limit on contingent liabilities, minimum net worth, etc.). Extra analysis is being completed on tenants, sales figures and lease reviews inclusive of co-tenancy and kickout clauses or any other hurdle that allows the tenant to pay less than the contracted rent. Ongoing debt service covenant tests or cash sweep tests may be required to cover perceived risks. For development transactions, lenders will require a higher level of preleasing (60% or more) and require all the anchors to be signed prior to closing. FOR MORE INFORMATION Visit pnc.com/dcm. Services such as public finance investment banking, securities underwriting, loan syndication, and securities sales and trading are provided by PNC Capital Markets LLC ( PNCCM ). PNCCM, member FINRA and SIPC, is a wholly-owned subsidiary of The PNC Financial Services Group, Inc. ( PNC ) and affiliate of PNC Bank, National Association ( PNC Bank ) The PNC Financial Services Group, Inc. All rights reserved. CIB ENT PDF

17 MARKET INSIGHTS 3Q 2017 ESOP INSIGHTS UNDERSTANDING ESOPS AS AN OWNERSHIP TRANSITION ALTERNATIVE By Julie Williams, Managing Director, National Lead of ESOP Solutions, PNC Bank As a business owner, you have a variety of options to achieve your liquidity and ownership transition/business exit objectives, including an IPO, a sale to a third party outside buyer, or a sale to a related party such as a family member or management. A sale to an ESOP is one transition option that is often overlooked and commonly misunderstood. ESOPs provide owners with the ability to attain liquidity and address transition objectives in a tax advantaged manner. ESOPs provide flexibility and intangible benefits that are difficult or impossible to achieve with alternative exit strategies. Whether your goal is to diversify while staying actively involved in the business or to execute on a complete sale of the business, an ESOP can accomplish either, among other objectives. WHAT IS AN ESOP? In its simplest form, an ESOP is a qualified retirement plan. ESOPs differ from other qualified plans in two key ways: (1) they are permitted to borrow money and (2) they are designed to invest primarily in the stock of the sponsor company. These features make it possible for ESOPs to acquire shares of stock from selling shareholders and facilitate the transfer of ownership to employees (as beneficiaries of the ESOP trust) over time. Beyond being a traditional retirement plan, ESOPs serve as a corporate finance vehicle that can provide liquidity to selling shareholders while transforming employees into owners. HOW DO ESOPS WORK? In a traditional leveraged ESOP, the company borrows money from lenders (which may be third party sources or selling shareholders themselves), and then loans the proceeds to the ESOP trust for the purpose of acquiring shares. The shares purchased by the ESOP are allocated to employee accounts over time as the ESOP repays its loan to the company. The end result is that employees obtain beneficial ownership in the company. Employees have a right to receive a distribution from the plan upon separation from the company by reason of retirement, termination, disability or death. The amount that the employee is entitled to is the value of their account which, in the case of an ESOP, would be the current value of the stock allocated to their account. INTANGIBLE BENEFITS TO OWNERS It is common for owners to articulate objectives that go beyond the price they hope to achieve from the sale of their business. They want to take care of their loyal customers, employees and vendors and they want their mission and legacy to continue to thrive. In some cases, owners want to begin the transition process and obtain liquidity, and at the same time remain involved and possibly even retain operational control. ESOPs facilitate a succession strategy that allows the owner to steadily transition from CEO to board member to full retirement as desired. Many owners value the opportunity to be a part of a successful handoff to the employees, setting the company and the employees on a course that is congruent with their goals for both parties. ESOP Insights 1

18 ESOP Insights 2 STRUCTURAL BENEFITS FOR THE COMPANY ESOPs can address a number of common concerns that sellers and buyers have around executing the sale transaction and successfully operating under a new ownership structure. Reduced execution risk: You may hear that ESOPs are a friendly buyer. ESOPs can allow for transition of ownership with little disruption to the business. Compared to a third party sale, there is generally a higher certainty of closing once the decision is made to consummate a sale to an ESOP. Flexibility: The terms of the transfer of the ESOP shares can be very flexible. An owner may sell the entire stake in the business, sell a minority stake as a way to take chips off the table and diversify assets, or set in motion a plan to gradually sell shares to the ESOP over time. Ability to maintain legacy and reward employees: Owners often care deeply about the culture of their company and believe that the employees and the culture itself are a key element of the company s past and continued success. Owners who prioritize preservation of culture and perpetuation of legacy are often strong candidates for an ESOP. EMPLOYEES OF ESOP-OWNED COMPANIES: ESOPS HAVE A POSITIVE IMPACT ON EMPLOYEES Job Satisfaction & Motivation Exhibit higher job satisfaction, organizational commitment, motivation and workplace participation Job Security Are four times less likely to be laid off than employees of companies that do not have employee ownership 1 Superior Retirement Benefits Retire with substantially higher retirement assets Companies contribute 50% to 100% more to ESOPs than non-esop companies do to 401(k) plans. 2 ESOPs have higher rates of return than 401(k) plans and are less volatile. 2 1 The General Social Survey, Department of Labor Study, NCEO, 2017

19 ESOP Insights 3 TAX BENEFITS The tax advantages associated with ESOPs can be significant for companies that sponsor ESOPs as well as for the selling shareholders who opt to transact with them. To encourage the application of ESOPs, Congress enacted certain tax incentives under the premise that employee ownership enhances company productivity, marketplace competitiveness and employee job security, satisfaction and motivation. When the intangible benefits of employee ownership (employee engagement, motivation, productivity) combine with meaningful cash flow enhancements from tax savings, the impact on companies can be tremendous. ESOPS HAVE A POSITIVE IMPACT ON COMPANIES INDEPENDENT STUDIES SHOW COMPANIES WITH EMPLOYEE OWNERSHIP ARE: More Competitive More stable and better for the larger economy S corporation ESOPs outperformed the S&P Total Returns Index in terms of total return per participant by 62% from 2002 to More Stable and Resilient Perform better through difficult business, economic and industry cycles The default rate on bank loans to ESOP companies during the period was, on average, 0.2% percent annually 10 times lower than levels experienced more broadly by mid-sized U.S. companies. 2 Great Places to Work Are frequently recognized as great places to work and experience greater employment stability Generally, about 55% of the organizations on Fortune s 100 Best Companies to Work For list (that are not nonprofits or professional partnerships) have some kind of employee ownership plan. 3 Strong Contributors to the Economy Companies that are S corporation ESOPs are proven job-creators, even during tough times While overall U.S. private employment in 2008 fell by 2.8%, employment in surveyed S corporation ESOP companies rose by 2%. 4 1 Ernst and Young s Quantitative Economics and Statistics (QUEST), Default Rates on Leveraged ESOPs, Summary, NCEO, NCEO compilation of multiple Fortune 100 Best Companies to Work For rankings since 2006, Georgetown University / McDonough School of Business Study, 2010

20 ESOP Insights 4 Seller tax benefits: Under certain circumstances, sellers can defer or potentially eliminate capital gains tax on the sale of stock to an ESOP (utilizing Section 1042 of the Internal Revenue Code [ IRC Section 1042 ]) and therefore may achieve higher after-tax proceeds compared to a sale to a third party. Company tax benefits: There are several avenues through which a company can realize tax benefits associated with ESOP ownership. Most significant is the case where the ESOP owns 100% of the company s stock and the company is an S Corporation. The ESOP trust is a tax exempt entity once the trust owns 100% of the company s outstanding equity, the company no longer is required to make tax distributions on earnings attributable to ESOP shares. Effectively, the 100% S Corporation ESOP-owned company no longer pays federal income tax and in most cases no longer pays state and local income tax. This meaningful cash savings is retained in the company and can be used to repay transaction debt and to reinvest in the business. In the case where the ESOP owns less than 100% of the stock, the company will still benefit meaningfully by having the ability to deduct the full transaction price over time. A FAVORABLE ENVIRONMENT FOR ESOP TRANSACTIONS Current market conditions are favorable for ESOP transactions. Through 2015 and 2016, the strength of the economy has led to strong valuations and capital markets both of which are forces behind robust interest in selling businesses. ESOPs, as one of the few ways to sell your business, are capturing their fair share of this wave of ownership transition. FLEXIBILITY NOT COMPLEXITY We often hear ESOPs described as complex. However, it is because ESOPs can be used to address myriad possibilities that makes them such a powerful tool. It is a widely held view of many ESOP companies that the benefits of employee ownership are worth overcoming the inherent complexities of selling to and operating with an ESOP. It is important to note that ESOPs are not appropriate or attractive for every situation. There are additional considerations that should be weighed, including but not limited to: Inconsistent earnings (cyclicality): ESOPs tend to be best suited for businesses with consistent and predictable earnings so that they are well-positioned to service the transaction debt and future repurchase obligation requirements. Compelling strategic offers: ESOPs can pay no more than fair market value for the stock. Fair market value is defined as the price negotiated between a hypothetical willing buyer and willing seller. If the selling shareholder is seeking to maximize his or her sale price, then an ESOP may not be the best means to achieve this goal particularly if there is a buyer that would be willing to pay a premium for the business (a price greater than fair market value) for strategic reasons. Upfront liquidity: When selling to an ESOP, the cash proceeds available to the selling shareholder at closing will be limited by the company s debt capacity. This means that a meaningful portion of the total sale proceeds may be deferred and paid to the seller over a period of time. If you desire to maximize cash proceeds at closing, an ESOP may be less attractive versus alternative sale options. Further, if the company s operations require significant growth capital or have other demands on capital, a leveraging event for an ESOP may not be in the best interest of the company. Still, it is a worthwhile exercise to understand whether an ESOP could be used as a tool to realize the financial, tax, organizational, personal and legacy benefits of ESOPs.

21 ESOP Insights 5 SELECT FINANCINGS WITH ESOP CUSTOMERS Arranged $1 million senior revolver and $8 million senior term loan to facilitate a 30% ESOP purchase of a kitchen, bath and home goods distributor Arranged $40 million senior revolver and $45 million senior term loan to facilitate 100% ESOP purchase of Southeast construction contracting services company Arranged $130 million senior ABL revolver to recapitalize and reorganize 100% ESOP-owned Midwest technology company Provided $65 million senior revolver to Northeast government contractor to finance ESOP share redemptions Provided $30 million senior revolver and $30 million senior equipment facility for Northeast truck-leasing business to facilitate minority ESOP purchase and scheduled equipment acquisitions Financed $130 million in senior credit facilities to manufacturer of commercial kitchen equipment ABOUT JULIE WILLIAMS Julie Williams is Managing Director and the National Lead of ESOP Solutions for PNC Bank. She has more than 15 years of experience advising companies and business owners on various aspects of ESOP transactions. Clients and prospects of PNC Bank leverage her knowledge and experience as they evaluate the benefits and considerations of using an ESOP as an ownership transition and liquidity solution. Williams also serves as a resource for PNC clients as they execute their corporate strategy with the added complexity of ESOP ownership. Prior to joining PNC, Williams held senior positions with major financial institutions in the Midwest, focusing on ESOPs. Williams earned a bachelor s degree in business administration from the University of Michigan and a master s degree in business administration from the University of Chicago, Booth School of Business. She is licensed by FINRA with a Series 79 and Series 63. Financed $49 million in senior credit facilities to automotive original equipment manufacturers Provided $34.5 million bank loan to facilitate investment in Qualified Replacement Property for ESOP Section 1042 transaction Financed $28 million sale to ESOP of manufacturer of clean room facilities Financed $25 million sale to ESOP-owned manufacturer of retail selling environments Refinanced $6 million in senior credit facilities to ESOP-owned distributor of educational materials for health and science professionals FOR MORE INFORMATION Ask how PNC s ESOP Solutions group helps companies transition to an ESOP structure and assists existing ESOP clients in maximizing performance. Contact Julie Williams at julie.williams@pnc.com or PNC and PNC Bank are registered marks of The PNC Financial Services Group, Inc. ( PNC ). Banking products and services provided by PNC Bank, National Association, a wholly-owned subsidiary of PNC and Member FDIC. Products and services may also be provided by or conducted through other subsidiaries of PNC. This article was prepared for general information purposes only and is not intended as legal, tax or accounting advice or as recommendations to engage in any specific transaction, including with respect to any securities of PNC, and do not purport to be comprehensive. Under no circumstances should any information contained in this article be used or considered as an offer or commitment, or a solicitation of an offer or commitment, to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Neither PNC Bank nor any other subsidiary of The PNC Financial Services Group, Inc. will be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission The PNC Financial Services Group, Inc. All rights reserved. CIB ENT PDF

22 MARKET INSIGHTS 3Q 2017 RECENT TRANSACTIONS HARRIS WILLIAMS & CO. SELL-SIDE ADVISORY Harris Williams & Co. advised Pella Corporation on the sale of its subsidiary, EFCO Corporation (EFCO), to Apogee Enterprises, Inc. (Nasdaq: APOG). EFCO is a leading U.S. manufacturer of architectural window, curtain wall, storefront and entrance systems for commercial construction projects. Harris Williams & Co. served as the exclusive advisor to EFCO. The firm advised Dade Paper & Bag Co. (Dade) on its combination with Imperial Bag & Paper. Dade is a leading distributor of food services disposables and janitorial supplies, serving customers across more than 20 states with an emphasis on supermarkets, food service providers, cruise lines and schools. Harris Williams & Co. served as the exclusive advisor to Dade. Harris Williams & Co. served as the exclusive advisor to Truck Bodies and Equipment International (TBEI), a portfolio company of GenNx360, on its sale to Federal Signal Corporation (NYSE: FSS). TBEI is a leading U.S. manufacturer of dump truck bodies and trailers. Harris Williams & Co. served as the exclusive advisor to Pie Squared Holdings LLC, parent company of PizzaRev LLC (PizzaRev), on its sale to a subsidiary of Cleveland Avenue LLC. PizzaRev is a leading fast-casual pizza concept, offering highly customizable and high-quality pizzas cooked in under three minutes. SOLEBURY CAPITAL IPO/BLOCK TRADE ADVISORY Solebury Capital advised on an IPO of $550 million for Schneider National in April 2017, the first trucking IPO in nearly seven years. Solebury Capital advised on an IPO of $185 million for Floor & Decor, a portfolio company of Ares Management LLC and Freeman Spogli & Co. in the retail space, in April As of quarter-end, the deal was the best performer to date of all 2017 IPOs. Solebury Capital advised on a follow-on of $310 million for JELD-WEN, an Onex Partners portfolio company in the building products space, in May This was the company s first follow-on since its January 2017 IPO, with the stock up by 34.2%. Solebury Capital advised on a follow-on of $259 million for Canada Goose, a Bain Capital portfolio company in the retail space, in June This was the company s first follow-on since its March 2017 IPO with the stock up by 62.4%. PNC DEBT CAPITAL MARKETS ACTIVITY Served as Lead Left, Administrative Agent, Joint Lead Arranger and Joint Bookrunner on ICF International s $600 million revolver. Served as Lead Left, Administrative Agent, Joint Lead Arranger and Joint Bookrunner on Prologis Targeted U.S. Logistics Fund LP s $350 million in five-year and sevenyear term loans. Served as Lead Left, Administrative Agent, Sole Lead Arranger and Sole Bookrunner on C&J Energy Services new $200 million asset-based revolver and as co-manager on the $227.5 million IPO to back the company s emergence from bankruptcy. Served as Lead Left, Administrative Agent, Sole Lead Arranger and Sole Bookrunner on EPAM Systems $300 million revolver. PNC and PNC Bank are registered marks of The PNC Financial Services Group, Inc. ( PNC ). Banking products and services provided by PNC Bank, National Association, a wholly-owned subsidiary of PNC and Member FDIC. Products and services may also be provided by or conducted through other subsidiaries of PNC. Services such as public finance investment banking, securities underwriting, loan syndication, and securities sales and trading are provided by PNC Capital Markets LLC ( PNCCM ). PNCCM, member FINRA and SIPC, is a wholly-owned subsidiary of The PNC Financial Services Group, Inc. ( PNC ) and affiliate of PNC Bank, National Association ( PNC Bank ). Investment banking services are provided by Harris Williams LLC, a registered broker-dealer and member of FINRA and SIPC, and Harris Williams & Co. Ltd., which is a private limited company incorporated under English law with its registered office at 5th Floor, 6 St. Andrew Street, London EC4A 3AE, UK, registered with the Registrar of Companies for England and Wales (registration number ). Harris Williams & Co. Ltd. is authorized and regulated by the Financial Conduct Authority. Harris Williams & Co. is a trade name under which Harris Williams LLC and Harris Williams & Co. Ltd. conduct business. Harris Williams LLC is a subsidiary of The PNC Financial Services Group, Inc. Equity capital markets advisory and related services are provided by Solebury Capital LLC, a registered broker-dealer and member of FINRA and SIPC. Solebury Capital LLC is a subsidiary of The PNC Financial Services Group, Inc. Lending products and services, as well as certain banking products and services, may require credit approval The PNC Financial Services Group, Inc. All rights reserved. CIB ENT PDF